Balance of power on Strip could shift if new owners snap up sold-off casinos

The future of Las Vegas gaming is taking shape even as the economy shakes up the casino industry.

Casino companies are talking to lenders about restructuring debt; others are talking to attorneys about what life after bankruptcy could look like.

Banks have already taken over one project, the $3.9 billion Cosmopolitan, and could take over others.

These moves open opportunities for new companies to land on Las Vegas Boulevard. Deutsche Bank is rumored to have a deal with Hilton Hotels Corp. to take over and rebrand the Cosmopolitan, although neither side will comment. And a couple of familiar names have already re-entered the market: Former New Frontier owner Phil Ruffin bought Treasure Island from MGM Mirage for $775 million, and former MGM Mirage executive Alex Yemenidjian is poised to take ownership of the Tropicana.

No one is sure how far these changes will go.

Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno, said Atlantic City's collapse in the late 1980s and early 1990s is the only situation that comes close to paralleling what is happening in Las Vegas now.

Although there were many Atlantic City bankruptcies, most notably Donald Trump's, a game-changing turnover in ownership didn't take place. One can't say the same for Las Vegas.

"Ownership is likely to change with a number of the major companies," Eadington said. "We're likely to see spinoffs at Harrah's, Las Vegas Sands and MGM Mirage, as all these companies come down the line. They're all so distressed on the debt side they've got spin-off assets."

David G. Schwartz, director of the University of Nevada, Las Vegas' Gaming Research Center, said the downturn could let new casino owners enter the Strip market.

"It could be an opportunity for groups that haven't been involved in gaming officially, but have had a long interest in gaming, to decide to get involved," Schwartz said. "In the big picture, people have been gambling for a long time, gambling is pretty durable. I don't know if gambling is going anywhere."

MGM Mirage is the dominant casino company and landholder along the Strip. Its holdings stretch from Mandalay Bay to the south to 40 acres of land owned in a joint venture with Kerzner International Holdings on the corner of Sahara Avenue to the north.

Officials for the casino giant, which is struggling with nearly $13 billion in debt as it funds the completion of the $8.5 billion CityCenter, have said that every asset within the company is open for discussion of a possible sale.

Former New Frontier owner Phil Ruffin was the first to pounce on the proclamation, buying the Treasure Island in a $775 million deal that closed in March.

Since then, rumors have swirled about who the next buyer could be and what the next MGM Mirage property to be scooped up might be: The Mirage, Bellagio or one of the company's seven other local properties. Casino developer Steve Wynn has been mentioned as a potential shopper, along with regional casino operator Penn National Gaming.

Executives for the Wyomissing, Pa.-based company said during an earnings call in April that they remain interested in acquiring a single property on the Strip -- at the right price.

"We don't want to own Las Vegas, we don't want to own the Strip," Penn National Chairman and Chief Executive Officer Peter Carlino said. "What we want and believe we need to sort of round out our portfolio is a good product that's well-located, that fits the profile of our customer base. ... We're looking for the kind of product that's going to serve the kind of folks who frequent our properties, and that's it."

Penn National has about $1.5 billion in cash available for a casino purchase. The money came from breakup fees awarded last summer after a private equity firm aborted a buyout bid. Penn National operates 19 casinos and racinos in 15 states and Canadian provinces, but does not own a resort in Las Vegas or Atlantic City.

Penn National is also rumored to be talking to Harrah's Entertainment, which owns seven hotel-casinos on the Strip and the Rio, but neither side will confirm the discussions.

Eadington said Penn National may be shut out if it waits too long for prices to drop.

"The impression I have is they're waiting for the price to get awfully close to zero," he said. "They're waiting for a giveaway. If they're waiting for The Mirage or some other property to get down to a price that is ludicrous, at that point, other buyers are going to be around. But we don't know who they are yet."

Although MGM Mirage may sell more properties to reduce its balance sheet, it leveraged some of its Las Vegas holdings to fund the completion of CityCenter.

The project's financing and MGM's funding obligations are secured by assets including Circus Circus and some of the company's land holdings along Las Vegas Boulevard.

Therefore, if MGM Mirage defaults on any of its obligations with CityCenter, the banks could become large landholders on the Strip and could own a casino.

Was Deutsche Bank's foreclosure of the Cosmopolitan project in March 2008, and its subsequent $1 billion purchase of the property, a harbinger of banks' dissipating faith in Las Vegas gaming? Perhaps.

Banks, which have collectively lent billions of dollars along Las Vegas Boulevard, have increasingly defaulted on numerous established casinos, or projects under construction. From Hooters Hotel to the $3.1 billion Fontainebleau project under construction on the Strip, banks have grown increasingly anxious about their exposure to gaming.

Bill Lerner, a principal with gaming research firm Union Gaming Group, said some banks may be looking to exit gaming, while others may want to minimize their exposure.

"You're going to continue to see a lot of commercial bank exposure to the sector," Lerner said. "But, it's probably going to be accomplished in a way that banks can mitigate their risk."

Fontainebleau, near the Riviera, was recently served with an event of default by Bank of America and 10 other lenders, who subsequently reneged on $800 million in financing.

A second group of lenders pulled back on part of a $130 million loan the developer planned to use to finance construction. Contractors slowed construction on the project, laying off a large majority of the 3,300 construction workers in late April when the scheduled monthly construction payment did not arrive.

Many of the lenders, some of which have been criticized for tightening credit while receiving tens of billions of dollars in federal bailout money, are also exposed at CityCenter and other casino companies along the Strip.

"In recent months, when one has taken a look at the development pipeline, there have been questions about every project's viability," Lerner said. "Whether it's funding or future demand. Given the dynamics in this market and given how differently banks are thinking of the world, I am not shocked to see commercial banks in this case look to reconsider their exposure."

The parent company of the 54-year-old Riviera is in discussions with Wachovia Bank after receiving a default notice. It now hopes to restructure a $245 million debt load outside of bankruptcy court.

On April 7, Wells Fargo Foothill issued a default notice to the owners of Hooters Hotel, which has $141 million in debt. The bank is also among a group of creditors negotiating a restructuring with Mesquite operator Black Gaming after that company defaulted on $188.7 million in debt late last year.

These gaming companies could be closest to declaring bankruptcy, ending up bank-owned, owned by investment funds, or run by third-party operators.

Eadington mentioned Hooters and Riviera as possible properties that could become victims of "economic Darwinism" and close if the economic downturn continues to cut into cash flows.

"They're weaker properties in comparison to the main Strip properties," Eadington said. "And just on a performance basis, they're going to be considerably weaker. And you have the cutthroat competition on room prices, which is just devastating for cash flow. And that's going to continue as long as demand is subpar."

Herbst Gaming in March became the first of what is expected to be many local casino operators to file a Chapter 11 bankruptcy plan. The plan might be a gauge of what other final plans could look like during the next few years, analysts said.

After negotiating restructuring terms on $1.2 billion in debt for a year with its creditors, Herbst retained control of its slot route, Nevada's largest. Lenders, led by U.S. Bank, will acquire the company's 15 casinos in Nevada, Iowa and Missouri in exchange for the cancellation of $330 million in bank notes.

Nancy Rapoport, a bankruptcy law professor at the Boyd School of Law at UNLV, said whether companies can retain control of casino operations will depend on whether the creditors believe the problem is a bad economy or bad management.

"The lesson with any (prepackaged bankruptcy) is, you've got to get control of the most ornery of your creditors or it's just going to be a garden-variety Chapter 11," Rapoport said. "It really will depend on how much you work with the creditors who have the biggest claims and the most contentious claims. If you can't get those, you can call it a prepack all you want but it won't be one."

Prepackaged bankruptcies are Chapter 11 reorganization plans prepared with creditors' cooperation. The bankruptcy-filing company's shareholders must first OK the plan in a vote. Then, company managers work out reorganization terms with creditors before bankruptcy is filed.

The cooperation with creditors can mean the debt-ridden companies spend less time in bankruptcy and can save on accounting fees and legal costs.

Herbst Gaming officials never said what they were looking for with lenders when the company began negotiating what eventually became a prepackaged filing.

Station Casinos, however, did make its plans known when it announced its intentions to negotiate a prepackaged bankruptcy in February. The company said it would continue to operate its 13 casinos, and its ownership and management structure would remain unchanged. Bondholders controlling $2.3 billion of the company's $5.7 billion in debt would receive new, higher-rate bonds with longer maturity for old debt surrendered at a discount.

The prepackaged plan was supposed to be voted on by March 2; however, Station Casinos has received two forbearance agreements -- deals to postpone, reduce, or suspend payment due on a loan for a limited time -- as the locals gaming company and lenders continue to discuss the proposal.

"Prepacks are always a risk because you can end up with people who think they're going to have a prepack when in fact, when they get in there someone objects and says, 'Whoa, we're not happy with this plan.' "

Tropicana Entertainment reached bankruptcy agreements with its creditors in March, although the plans weren't prepackaged. The U.S. Bankruptcy Court in Delaware on Tuesday approved the deal, which will have the Tropicana on the Strip broken off from the company. The property will be partially owned and operated by Yemenidjian, who partnered with a private equity investor to reportedly buy up the company's depressed bonds to leverage the deal.

The remaining company, which will operate three casinos in Nevada and five others across the country, will be partially controlled by billionaire investor Carl Icahn.

Icahn, who will be one of the two largest equity holders in postbankruptcy Tropicana Entertainment, may be interested capitalizing the company to buy another Strip property, people with knowledge of the situation said.

He would not be new to the Las Vegas casino business, having sold his Clark County gaming interests that included the Stratosphere and both Arizona Charlie's in February 2008 for $1.2 billion.

Contact reporter Arnold M. Knightly at aknightly @reviewjournal.com or 702-477-3893.